Home building to provide less economic support as market shifts toward apartments: economists

There’s a lot to like in Tuesday’s report on home construction. Building rates surged, bouncing higher in July after the volatile series dropped in June. Plans to construct homes jumped up, too.

But nestled in the data’s details were a couple of trends that don’t bode well for the home-building industry’s role in the greater economy. Apartment building is widening its share of the market, slicing housing’s contribution to gross domestic product, economists said.

“At the margin a shift from single-family to multi-family construction reduces the contribution of housing to GDP, as less effort goes into a multi-family unit versus a single-family unit,” said Paul Diggle, property economist at Capital Economics.

Here’s one way to quantify the economic impact of building a single-family home versus an apartment. The average construction cost for a single-family home is about $323,000, generating almost three full-time equivalent jobs, according to a recent estimate from the National Association of Home Builders. Meanwhile, the construction value for an average rental apartment is $128,000, and generates a bit more than one full-time job.

Tuesday’s data show that construction trends for apartments is outpacing those for single-family homes. Starts in buildings with at least five units sprang up 33% in July, while single-family-home starts rose 8%, according to the U.S. Commerce Department. Meanwhile, building permits rose 24% for apartments and 1% for single-family homes.

Looking at longer-term trends, there were about 1.6 starts on single-family homes for each start on an apartment in July – the slimmest ratio since 1985.

It’s important to note that builders are simply responding to consumer demand. That is, they are building apartments because that’s what households want.

“My assessment is that this is all normal and healthy. Hopefully, builders will gauge it roughly correctly and build the ‘right’ mix of housing for a changing market,” said Stephen Stanley, chief economist at Pierpont Securities. “Building single-family homes that no one wants is certainly worse than building apartments that will get filled.”

What’s going on is that home ownership rates dropped after the housing boom, with some former owners now living as renters. Meanwhile, many young adults want to rent, upping demand for apartments. And wary builders are carefully planning projects, trying to avoid another housing glut.

Eventually, economists say, younger families may want to own a home, a trend that would also help other families afford to buy a new place. The labor market is firming — monthly hiring recently hit the fastest pace since 2008 — a trend that should lift home ownership.

However, the building market and single-family homes faces a wildcard in the form of mortgage financing. While there’s been some easing, access to credit remains strict. Indeed, during a Tuesday conference call, Home Depot
/quotes/zigman/229488/delayed/quotes/zigman/229488/lastsaleHD executives said that mortgage availability is a top concern. As long as mortgage standards remain tight enough to prevent a large chunk of borrowers from obtaining a loan, that will be another factor in favor of more apartment building.